FM puts regulators on alert to face Fed taper

Govt to woo sovereign funds to invest in G-sec

Sovereign wealth funds would be approached to invest in government securities. This is one of the strategies to prepare India for the effects of the US Fed withdrawing the quantitative easing in that country.

Finance minister P Chidambaram on Thursday asked financial sector regulators to draw up plans to counter outflows when the US begins to taper the quantitative easing early next year.

A finance ministry official said the government plans meet to sovereign wealth fund managers based in Australia and West Asia. The investment would be sought in the underutilised portion of the $5 billion reserved for such investors.

The cap on FII inflows is $80 billion and so far only 30-40 per cent of the limit has been utilised. The government is keen to encourage more inflows in debt.

The government, however, does not expect any adverse change in foreign fund flows into equities.

Addressing the meeting of the financial stability and development council, Chidambaram said RBI, Sebi and other financial regulators should take concrete measures to avert any adverse impact of tapering of the monetary stimulus in the US.

Chidambaram would meet representatives of foreign fund houses over the next two months to attract fresh investment and also to ensure that they remain invested in the country. The stock exchanges would help organise his meetings with large pension funds and institutional investors.

He said the regulators should use the “opportunity available due to postponement of the reversal of the monetary policies in advanced economies to further address the macroeconomic imbalances.”

The US government had provided a monthly $85 billion of quantitative easing. In lay terms this is the money that comes into the market as a result of bond buying by the US government — providing a stimulus to its economy. Part of the money goes finds its way into other countries, including India.

Its gradual withdrawal or tapering is expected to start early next year after it was deferred in September. The tapering could hit emerging economies like India, as there could be some FII outflow. The Indian government is gearing up to mop up an additional $20-30 billion to ensure adequate cushion in the foreign exchange reserves to absorb the effects of a sudden outflow.

The government would also finalise an action plan for implementation of all FSLRC principles relating to regulatory governance, transparency.

Steps to be taken by regulators and the government to facilitate the “corporate distress resolution mechanism” as laid out in the Companies Act were also discussed.

Chidambaram was confident that current account deficit (CAD) would be contained at the projected $70 billion, or 3.7 per cent of GDP, this year. The redline of 4.8 per cent for fiscal deficit too would not be breached, he said.

The finance ministry would analyse the public comments and feedback to fine tune the draft Indian financial code suggested by FSRLC, headed by former Justice BN Srikrishna. The body has suggested merger of financial sector regulators like Sebi, Irda, PFRDC and FMC into a Unified Financial Agency (UFA). The role of RBI is to be restricted to regulating banks and managing monetary policy, its report has suggested.

FSDC was apprised of the progress made by its sub-committee and technical groups in a number of areas like drawing up a consolidated template for a bird’s eyeview of financial inclusion in different segments of the financial sector, remedial measures to address the deteriorating asset quality of public sector banks and formation of state level coordination committees to curb unregulated companies collecting public funds.